Forgotten OPEC state gains steam—but not for long


Crude oil production at one largely forgotten member of OPEC is on the rise, but that's unlikely to affect already plummeting oil prices.

For the first time in almost a decade, Nigerian crude oil output surpassed 2 million barrels a day in September, propelling OPEC's oil production to a one-year high.

File photo: A suspected oil thief rides a wooden boat full of stolen crude oil on the creeks of Bayelsa, Nigeria
AP Photo | Sunday Alamba File

Nigeria is one of only two Sub-Saharan OPEC states, and while it doesn't shape the direction of oil prices like Saudi Arabia does, its production can affect pricing on the fringes.

But experts say that the recent surge will be short lived.

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That's because the issues that make output in Nigeria so volatile have not gone away, said Richard Mallinson, geopolitical analyst at research firm Energy Aspects in London.

"You can have another reversal anytime, and this recovery will be easily lost," Mallinson said. "But it hasn't been a straight line decline. There are cycles of disruptions and brief recovery periods," he said. The jump in output now is one of those short-lived recoveries, he said.

Only a few months back, in May, production hit a low of 1.6 million barrels a day.

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Oil and gas make up only about 14 percent of Nigeria's gross domestic product, but account for over 70 percent of government revenue and 90 percent of export earnings, according to the U.S. Department of State.

The Nigerian government hopes to increase production capacity to 4 million barrels by 2020. But Nigeria's production is unlikely to exceed 2 million barrels per day by the end of the decade and will likely fall to an average around 1.8 million, according to Energy Aspects' October forecast.

Production gains in the Niger Delta—the country's main artery for oil production—are hindered by industry-scale theft, domestic insecurity and government inaction.

Pipeline vandalism increased 58 percent over the previous year, according to the state-owned Nigerian National Petroleum Corporation in its annual statistics bulletin. About $7 billion of oil revenue is lost every year due to oil theft, said Dolapi Oni, head energy analyst at Ecobank, a pan-African banking conglomerate.

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Theft has plagued the Delta for years, but the government's military resources are running thin due to religious-based violence in the north, caused by militant groups like Boko Haram, Oni said.

'Clear growth potential'

The insecurity caused by oil thefts and regional violence has led to divestments from the Delta, according to Wumi Iledare, professor at Louisiana State University and president of the International Association for Energy Economics, a 3,000 member strong non-profit of energy researchers.

Recently, foreign oil majors including ConocoPhillips, Royal Dutch Shell, France's Total and Italy's Eni have disposed of some of their onshore Nigerian oil assets.

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Royal Dutch Shell made sale agreements for four onshore oil blocks as well as a pipeline. And Chevron is selling off three onshore oil blocks to smaller, local operators.

Still, Nigeria "has clear growth potential, particularly in deep-water and onshore gas," Shell said in a statement to CNBC. Shell is not selling all of its Nigerian assets and will continue to hold several onshore and shallow-water licenses.

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In an attempt to re-attract foreign investment and stabilize Nigeria's oil industry, the country's National Assembly introduced the Petroleum Industry Bill (PIB) in 2011. The bill would increase accountability and transparency for government-managed oil operations. And a new legal framework and regulatory agencies are designed to increase the attractiveness of onshore assets to foreign investors.

"International companies are being disenchanted with onshore production in Nigeria ... the bill would really help rehabilitate its image of onshore production and bring companies back," Mallinson said.

The bill is far from a silver bullet, but it is a first step toward reform in the industry, Iledare said.

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"As it stands, the bill gives too much power to the minister and president, which defeats the primary objective of transparency. The government needs to think more of national interest, instead of personal interest, to drive policies," he said.

But with Nigeria's 2015 presidential elections around the corner, the bill is unlikely to see progress in the next six months, which is a "huge, ongoing missed opportunity," Mallinson said.

What if Nigeria’s oil did pick up?

If Nigeria's oil production did manage to stabilize and bounce back for the long term, global oil prices could move even lower, Iledare said.

Internationally priced Brent crude was trading above $83 on Friday following the release of jobs data that showed unemployment declining in the United States, which is the world's biggest energy consumer.

"The relative improvement in production in recent months is already contributing to the global oversupply," Mallinson said. "Any pick up beyond levels now without resolving the core issues hurting the Delta would cause more volatility in oil prices."

However, said Iledare, significant production increases are unlikely to happen in the short term.